Is Timing the Market the Best Strategy for Selling your Business?
Many entrepreneurs think that the best time to sell is when market multiples are at their peak. But is trying to time the market really the way to go in hopes of getting the best deal? Let’s take a closer look at this idea.
Understanding Market Multiples
Market multiples compare a company’s valuation to similar companies in the market, often using ratios such as the price-to-earnings (P/E) ratio. Entrepreneurs commonly use market multiples as a key metric in determining the value of their company and deciding when to sell.
However, relying on peak market multiples may not always be a sound strategy.
Here’s why:
- Misconception of Peak Multiples: Many believe that peak market multiples signify the best time to sell, assuming they reflect the highest possible valuation of their company. This isn’t always true.
- External Influences: Market multiples can be influenced by various external factors beyond the company’s performance, such as market sentiment and economic conditions.
- Risks of Relying on Peaks: Making decisions solely based on peak market multiples can lead to overlooking the true value of your company and its long-term potential.
While market multiples can provide some context, it’s important to consider additional factors when considering your sale.
The Pitfalls of Market Timing
Attempting to time the market, while enticing, comes with its fair share of drawbacks. Picture it like trying to predict the weather. Some days you might get lucky, but more often than not, it’s just down to chance.
Market timing is inherently risky because it relies on predicting the unpredictable. To illustrate, consider an entrepreneur who decides to hold off on selling their business, anticipating even higher market multiples. However, the market unexpectedly takes a downturn, and those coveted peak multiples never materialize. In this scenario, the entrepreneur finds themselves holding onto their business, potentially missing out on other opportunities and exposing themselves to unnecessary risk.
Even if luck is on your side and you manage to time it right, selling at peak multiples isn’t without risk. Selling at the perceived peak could mean you’ve sold when the market is overheated, and valuations are inflated. Also, hyper-focusing on peak multiples might distract you from addressing other factors essential for the health of your business.
The Importance of Diversification
You’re probably familiar with the concept of diversification when it comes to investing. Simply put, when you spread your investments across different asset classes, industries, and geographic regions, you minimize risk. It’s the opposite of putting all your eggs in one basket. If one investment underperforms, others may offset the losses.
But diversification also plays a critical role when it comes to selling a business. If you sell your business at peak multiples and reinvest the proceeds, you could find yourself with a concentrated portfolio. In other words, a significant portion of their wealth could be tied up in a few high-priced securities. Initially, this can seem appealing. However, it can expose you to increased risk if those investments falter. Not to mention, selling at peak multiples also means you pay higher taxes, and potentially, minimize your returns.
Also, selling at peak multiples may limit your future growth opportunities. By cashing out at the perceived peak, there’s a chance you could miss out on potential upside if the market continues to grow or if your business could have expanded further. Diversification allows you to remain flexible and capitalize on emerging opportunities, ensuring a more robust and sustainable financial future.
Factors to Consider When Selling
Besides market multiples, there are other key factors you could consider when trying to time your sale.
For instance:
- Market Share Dynamics. Assess market share dynamics to gauge competitive position and growth potential. Also, we suggest you consider selling if your company isn’t increasing its market share, regardless of current multiples.
- Business Performance. Evaluate revenue growth, profitability, and operational efficiency to determine overall health and attractiveness to buyers.
- Strategic Fit. Consider alignment with long-term goals and potential synergies with buyers to maximize value.
- Timing Considerations. Assess macroeconomic conditions and industry trends to optimize timing for sale and mitigate risks.
Undoubtedly, these complexities may be a lot to wade through, particularly while running your business. This is why part of your approach to selling should involve reaching out to a trusted mergers & acquisitions advisor.
Every Business is Different
Of course, there’s no one-size-fits-all approach when it comes to selling your business. That’s where the experienced team at Allegiance can help. We have the people and resources to help you navigate and close your sale.
We recognize that your personal goals – perhaps to retire or pivot your career in a new way – don’t always align with changing market conditions. Our team can take the lead in helping pave a way for you to sell, no matter what the market is doing. In fact, we’ve successfully helped many other business owners, just like you, do just that.
To start a no-obligation conversation with one of our team members, please reach out.
Shane is a managing partner at Allegiance Capital, helping entrepreneurs and business owners run, scale, and (when the time’s right) sell their business. Prior to joining ACC, he served in the U.S. Army and now uses that experience to fuel his service to others both in and beyond the Dallas-Fort Worth community.